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Help Improve Your Financial Plan This Year with These One-time Adjustments

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It’s no secret that many people do not keep their New Year’s resolutions. Every year around this time, gym memberships go up and personal planners fly off the shelves. A few weeks later, the planner gets left on the train and the gym, well, it’s just so far out of the way! New Year’s resolutions have a whopping shelf life of about a month, and only 20% or so make it further.

Many of the struggles with keeping resolutions come from cultivating new habits – it’s easier to buy a gym membership than develop a new exercise routine. Fortunately, many areas of your financial life require a one-time adjustment and not necessarily an ongoing change in daily habits.

Let’s look at a few areas of your financial life where a one-time decision can open new possibilities and efficiencies in retirement planning, salary planning and Roth conversions.

Retirement Planning

Many advisors will tell you not to obsess over your retirement accounts and to sit on your hands to let the accounts grow. Yet adjustments need to be made occasionally. Your salary and assets may have changed, as well as your goals.

This disorienting year may have given you time to reflect on what you want retirement to look like. For some of us, it’s the first time we’ve thought about it. If you imagine yourself staying in your home and taking modest trips to see your grandkids, that’s one set of goals with a corresponding plan. If you imagine yourself traveling the world, landing in Arizona or Florida and golfing the days away, that’s an entirely different plan.

Using a tool like our retirement readiness quiz can give you a feel for how ready you are to retire, and get you thinking about specific goals that need plans leading up to them. Making adjustments, such as increasing your contribution or changing your mutual funds, is a “keepable” New Year’s resolution that may take only a brief check-in with your advisor. Then you can get back to sitting on your hands.

Contribution limits are also important to keep in mind, although they have not been raised this year. For your 401(k), the contribution limit is $19,500 and your catch-up contribution, if you’re over age 50, is still $6,500. For your IRA, the limit stays at $6,000 with a catch-up of $1,000.

After you’re done working, will your money still be working for you? Where will you receive income 20 years after that last paycheck? With Social Security replacing only around 40% of your income, where will you make up the difference? Better to think about these questions now before they’re right at your door.

Salary Planning

We are coming up on raise and bonus season, which for many of us is the next holiday on the calendar. That little bump at the beginning of the year often leaves us thinking of beaches in the summer or mountain excursions in the fall.

Again, this is time to hack your financial New Year’s resolution. Take at least a little of that bump and put it into your retirement, savings or investments. If you get a 5% raise, put 1% of that to work for you and your retirement – quickly, before you google new cars!

This year is unique in salary planning for many of us. A recent survey of 330 companies found they are seeking to recoup losses from COVID-19 by deferring pay increases and bonuses (31%) and cutting bonuses (15%). If you find yourself in this group, then it might be time to hold off on your increases.

However, don’t write off the whole year. As we’ve seen in the last few months, some of the strongest market activity in years occurred during 2020. We don’t know what the year will hold, and this “out of sight, out of mind” hack is a good tool when that bonus check does come.

The Year of the Roth Conversion

One of the planning opportunities you may find in analyzing your tax returns is the option of a Roth conversion. You and your advisor can work with software to create a hypothetical scenario – does a Roth make sense in your situation? How could that affect your financial picture now or, more importantly, in the distant future?

For those already in retirement, this is the year for conversions, mainly because required minimum distributions (RMDs) were suspended in 2020 as part of the CARES Act. How much money did that leave in your pocket this year? How can you put that to work for you?

Paying that initial Roth conversion cost with the money you saved now can tee you up for tax-free growth in the future, without RMDs. The hack here is to do this before you fall back into old habits and spend that leftover RMD money before you can use it to your planning advantage.

If you’re over the income limits for a Roth, you might consider the backdoor Roth IRA contribution. This strategy allows you to take advantage of the Roth structure no matter what your income is, and your saved RMD money can cover the initial expense.

A Roth can be an investment in the future, and if this year tells us anything, it’s that the future isn’t’ a given.

Progress over Perfection

One of the ways we sabotage ourselves with New Year’s resolutions is to make our goals too lofty. “I will go to the gym four times a week” might be a bit of a jump if your current exercise regimen is only occasionally taking the stairs. If you’re just starting a savings or investing routine, don’t expect yourself to max it out right away.

Progress over perfection is the key, especially in financial matters. And to start the journey by trying to take the biggest steps is to shoot yourself in the foot.

Try this hack. Think about the financial habits you want to change and give yourself a “grade” – maybe talk it over with a friend or your advisor. Say you come up with a C+: Your contributions to your 401(k) are minimal, your credit card usage is high enough to be uncomfortable, and you bought a new car on impulse.

By this time next year, you want a grade of B. What does that look like? Maybe adding 1% to your 401(k) contribution, cutting your credit card usage by 20% and driving that “used” car until a real problem arises. If you tried to jump to an A+ immediately, you’ve defeated yourself from the beginning.

With tax planning season coming up, this is the perfect time to consider adjustments.

One-Time Adjustments Can Have Lasting Impact

One interesting study showed that those who forgot they had an investment account did the best! Too often, we fall prey to behavioral bias and short-sightedness when handling our money too often, so deferring to out of sight, out of mind may be the best route.

Careful, quick adjustments are the kind of financial New Year’s resolutions we can keep. A few tweaks could save you thousands in the end. Set up a check-in with your financial advisor to start 2021, and let’s get some profitable hacks in place.

Make Your Appointment

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

Converting from a traditional IRA to Roth IRA is a taxable event.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

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